Let’s be honest, there is a lot of jargon when it comes to investing. In the current climate, we’re conscious that a lot of phrases are probably coming into your daily news consumption that you’re not quite sure on, so we wanted to help!
History tells us that investments can go down as well as up. It’s a well-worn, renowned disclaimer designed to provide a caution to all; they don’t always go the way you want them to. Less well known is the pattern the financial markets have followed throughout history. In the financial world, this pattern is referred to as Bull and Bear Markets.
What are Bull and Bear markets?
A bull market is one that is on the rise, whereas a bear market is in decline. The terms often related to the stock market but can be applied to anything traded; bonds, real estate and currencies for example. However, the rise and fall of these market prices are normally constant, so the term “Bull Market’ is often saved for the extended periods of time when a big portion of the prices are rising, typically when a market’s value has risen 20% from a 52-week high.
A “Bear Market”, is the opposite. The market is in decline, share prices have dropped, and there is a downward trend in the economy with rising unemployment. Sound familiar?
The good news is that history can show a Bear Market tends to be far shorter than a Bull Market, often only lasting an average of two to three years as opposed to six to seven years. Unfortunately, the loss within this time period can be much greater.
Bear Markets can be caused, as we’re witnessing, by any upset in the economy and any decline in stock market prices shakes investor confidence, often forcing them to take their money out of the market. This in turn, causes the decline in the stock market.
When do we know what type of market
Typically, if prices fall 20% or more from recent highs over an extended period, then we enter a Bear Market, and the reverse for a Bull Market. What is key to remember here is the “long-term” nature of investing. Whatever market we’re in, events will always cause knee-jerk reactions causing short term movements in the market.
What causes a Bear market?
Lots of different events can cause a Bear Market, whether it’s sector crashes, economic recessions or political changes.What we’re currently facing is a bear market triggered by a stock market downturn, which began way back on the 20th February 2020, when the COVID-19 pandemic began to hit global businesses and manufacturers hard. The Bear Market officially hit on 11thMarch, when many of the world’s largest market indexes had recorded a big drop.
What about volatility – is that big in a
Prices go up and down daily in a Bear Market, often happening regularly during periods of downtrends. One-day bursts followed by a series of large drops can play with your emotions and how you feel about your relationship with investing, but a long-term approach could help reduce stress significantly, ironing out the daily volatility produced by a Bear Market.
Does a Bear Market mean everything loses value?
No, it means that the market as a whole has dropped in value, but just because one market becomes a Bear Market, it doesn’t mean everything else does. A “bearish” trend may be related to an overall market, however individual stocks within that market may maintain their value or even appreciate in value.
At i-stock, we always build diversified portfolios, investing in a range of assets with the aim of reducing risk.
So, is a Bear Market good or bad?
It really depends on the reason behind your investments, and how you are doing it. Your portfolio may reduce in value, but as with any investment, this risk was always present. However, the emotional decisions can be what cause harm; panic-selling to withdraw investment money may only solidify a loss. It’s almost impossible to correctly time a market, so a long-term approach can be more beneficial than buying as markets drop, even if you will get a better price than if you’d bought at the peak. This can result in “pound cost averaging” – buying little and often so you buy at different prices to create an average purchase price over the longer term.
Does investing change in a Bear Market?
Warren Buffet, legendary business investor, has used a methodology called ‘value investing’, meaning investors buy stocks that are trading at a lower value than they probably should be, based on the quality and long-term return potential of that company. In a bear market, there may be plenty of undervalued stocks as investors can panic and sell all their shares, even ones with huge long-term potential.
At i-stock, we always say that investing is for the long-term, and this is never truer than in a Bear Market. The longer your money is invested, the greater the potential it typically has.
There have been numerous Bull and Bear Market cycles since 1929, with the economic recession in 2008 being the last Bear Market etched in our memories*. This, along with other previous Bear Markets, can be seen in the graph below via the red shaded areas:
Common wisdom is, if you pick a fight with a Bear, you will lose! Protect yourself!
Source: * https://www.thebalance.com/stock-market-crash-of-2008-3305535